In This List

TalkingPoints: S&P Leverage and Inverse Indices

TalkingPoints: Finding Resilience amid Uncertainty: A Low Volatility High Dividend Approach for the A-Share Market

TalkingPoints: Benchmarking Quality Small-Cap Equities in Brazil

The Case for Information Technology Dividend Growers

Indexology Magazine: Winter 2020

TalkingPoints: S&P Leverage and Inverse Indices

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Tianyin Cheng

Senior Director, Strategy Indices

  1. What are leverage and inverse indices and why are they important?

The S&P Leverage and Inverse Indices aim to replicate the daily performance of their underlying indices with a constant multiplicative factor, positive or negative, with or without embedded borrowing and lending costs. They offer market participants short-term trading tools for hedging and leveraging purposes. They also provide benchmarks for leverage and inverse products, such as leverage and inverse mutual funds, exchange-traded funds, exchange-traded notes, etc.

  1. What are the underlying securities of leverage and inverse indices?

The S&P Leverage and Inverse Indices can measure equities and futures indices. Examples of possible underlying equity indices would include the S&P 500® and the Dow Jones Industrial Average®.

The underlying futures indices could include equity futures indices, currency futures indices, commodity futures indices, and VIX® futures indices, such as  the Dow Jones Industrial Average Futures Index, S&P U.S. Dollar Futures IndexS&P GSCI Crude Oil, and S&P 500 VIX Short-Term Futures Index.

  1. What return types are there for leverage and inverse indices?

For equity-based leverage and inverse indices, the index return types follow the underlying indices and can be measured in price return, total return, or net total return.

For futures-based leverage and inverse indices, both excess return indices and total return indices are calculated. The difference in excess return and total return is explained in question 4.

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TalkingPoints: Finding Resilience amid Uncertainty: A Low Volatility High Dividend Approach for the A-Share Market

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Tianyin Cheng

Senior Director, Strategy Indices

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Izzy Wang

Analyst, Strategy Indices

The S&P China A-Share LargeCap Low Volatility High Dividend 50 Index is designed to offer liquid and tradable exposure to dividends  and low volatility, two well-known risk factors that have delivered risk premium in the China A-share market in the past.

The two factors are combined through sequential dividend and low  volatility screens. Companies exhibiting high dividend yield may fall in a “dividend trap,” since high dividend yield can be caused by decreasing stock prices rather than increasing dividend payments. Overlaying a low volatility screen on a high dividend portfolio may help to eliminate the dividend trap, resulting in improved absolute and risk-adjusted returns.[1]

Over the 10-year back-tested period, the index has shown robust return, lower risk, reduced drawdown, and cheaper valuation than its benchmark. The index may be appealing to those who wish to maintain equity exposure but limit risk or those who are interested  in increasing equity exposure without increasing risk.

Uncertainty has been a common theme throughout 2019 and rolling into 2020, with escalated risk of Covid-19. The S&P China A-Share LargeCap Low Volatility High Dividend 50 Index may help to provide an alternative for investors to ride through this challenging period.

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TalkingPoints: Benchmarking Quality Small-Cap Equities in Brazil

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Silvia Kitchener

Director, Global Equity Indices, Latin America

When it comes to small-cap equities, profitability matters. Over the past 25 years, the S&P SmallCap 600® has outperformed the Russell 2000 by almost 1.7% on an annual basis. A key driver of this outperformance was the quality bias that comes from the profitability screen that is built into the S&P SmallCap 600. What  happens when that same methodology is applied to small caps  in other markets? 

1. What are the characteristics of small-cap stocks and how have market participants used them traditionally?

An important characteristic of small-cap stocks is that they are considered growth stocks, because they have a higher potential for growth. Historically,  small caps have outperformed large caps over the long term. Studies have  shown that stocks with attractive price valuation and good growth prospects tend to outperform. Small-cap stocks also tend to be focused more domestically, offering a purer local play on Brazil growth. Furthermore, in smaller markets  like those in the Latin American region, small-cap indices can actually help develop the overall market by drawing attention to the smaller stocks, which may help create more demand for direct or indirect investment, either through individual stocks or through index-based strategies tracking small-cap indices.

2. The S&P/B3 SmallCap Select Index is part of a broader index series, the S&P Global SmallCap Select. What type of small-cap stocks do these indices track?

Small cap can be defined based on either a fixed market size or on a relative  size range, the latter being what we use in Brazil. We start with a broad view of  the market, with our country index taking into account all Brazilian companies that trade on B3 and meet the minimum size and liquidity criteria. We segment those by total market cap and then take the cumulative weight of the floatadjusted market cap to categorize the different segments. We use 70%, 15%, and 15%. The top 70% represents the large caps, the next 15% the mid caps,  and the bottom 15% the small caps.

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The Case for Information Technology Dividend Growers

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Karina Tjin

Analyst, Strategy Indices

It was once thought that companies from the Information Technology sector do not pay dividends.  While this may have been the trend a long time ago, it certainly has not been for the last decade.  Over the past 10 years, within the Information Technology sector of the S&P 500®, 26 companies initiated dividend payments and 59 companies increased their dividends at various points throughout those years, for a total of 376 dividend increases in the sector.

During the same period, with an increasing number of Information Technology companies paying dividends, the contribution to S&P 500 total return by these companies rose from 9.07% in 2009 to 16.33% in 2019 (see Exhibit 1).

This change in the Information Technology sector creates a need to measure the performance of its dividend growers.  To do this, S&P Dow Jones Indices recently launched the S&P Technology Dividend Aristocrats® Index, which seeks to track the performance of Tech companies that have a history of consistently increasing dividends.  

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Indexology Magazine: Winter 2020

Is passive investing as passive as it sounds? How do three different index-based strategies seek to boost diversification? Read the latest issue for the answers to these questions and more.

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